KARACHI, July 30: The State Bank on Saturday decided to cut the policy interest rate (discount rate) by 50 basis point, saying there were many indications that inflation would come down during the current financial year.

Acting State Bank Governor Yasin Anwar, who unveiled the policy during a news conference, said the interest rate would be 13.5 per cent the Aug-Sept period. The rate had remained unchanged since Dec 2010.

“The key parameter in this assessment is the outlook for inflation, which indicates that average inflation in FY-12 is expected to remain in line with the announced target,” he said. The government has set a 12 per cent inflation target for FY-12.

“The SBP’s forecast of average inflation ranges between 11 and 12 per cent during FY-12,” he said.

The government has also provided in the Medium Term Budgetary Framework (MTBF) a desired path of inflation of 9.5 percent and eight percent for the two subsequent years, he said.

Mr Anwar said bouts of inflation had now become commonplace. “A meaningful reduction in inflation will require consistent and credible implementation of monetary and fiscal policies,” the acting governor observed.

The Governor’s speech was full of optimism. He believed the government’s borrowing from the SBP would be negligible in the current financial, causing a fall in inflation.

Mr Anwar said that despite fiscal slippages, the government had adhered to restricting the stock of its borrowings from SBP to Rs1155 billion (on cash basis). “In fact the government retired these borrowings compared to both the end-June 2010 level as well as the mutually agreed limit of end-September 2010 level.”